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Israel 6-Year CPI Bond Falls on Lower Prices Bets; Shekel Drops

Israel’s inflation-linked government bonds dropped, pushing yields to the highest level in more than a week, on investor bets consumer prices will moderate in coming months as the economy slows.

The yield on the 3.5 percent consumer-price linked bonds due April 2018, rose one basis point, to 0.66 percent at the close in Tel Aviv, the highest since Oct. 10. The two-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, fell nine basis points to 244, implying an average annual inflation rate of 2.44 percent. The rate slumped 35 basis points this week, the biggest decline since the week ended May 17.

Economists’ 12-month inflation expectations fell to 2 percent on average from 2.6 percent the previous month, a central bank survey showed yesterday. Annual inflation was 2.1 percent in September, the Central Bureau of Statistics said this week. That was less than the 2.6 percent median estimate of 11 analysts surveyed by Bloomberg.

“Investors are selling CPI-linked bonds and buying non-linked government bonds as economists lowered their inflation forecast after the surprise in the data this week,” said Effi Cohen, a bond trader at Leader Capital Markets Ltd. in Tel Aviv. “Expectations of slower economic growth in coming months will also have an impact on inflation.”

‘Awfully Close’

Economic growth is expected to slow to 3.3 percent this year from 4.6 percent in 2011, according to central bank estimates, as Europe struggles with its debt crisis and global expansion slows. The yield on the 5.5 percent Mimshal Shiklit bonds due January 2022 fell three basis points to 4.11 percent.

Bank of Israel Governor Stanley Fischer warned this week that the world is “awfully close” to a recession. More than 40 percent of Israel’s gross domestic product is made up of exports, with Europe and the U.S., the largest markets.

The shekel weakened 0.3 percent to 3.8105 a dollar at 5:15 p.m. in Tel Aviv, trimming the advance for the month to 2.9 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, declined 0.1 percent to 275.12.

One-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, increased one basis point to 2.16 percent.

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